Finding Stable Ground amidst the Chaos – US Market, Positioning and Ideas

US Market, Positioning and Ideas

30th October, Busan, South Korea, an agreement struck between President Trump and President Xi – tariffs levied on Chinese imports into America are lowered from 57% to 47%, in exchange, China will resume its rare earths exports and its purchase of American soybean. In addition, crack down on the fentanyl trade, which in recent years has plagued the American people.

This has, temporarily at least for now, instilled some certainty within the markets, with the three major American stock indexes, S&P 500, Nasdaq composite and Dow Jones Industrial Average all closed on record highs. Mr. Trump often boasts about the success of the markets in his first administration, and he will most definitely credit himself for the recent success as well.

With that in mind, the attention will be shifted to the Fed chair position by the end of the year. With the shortlist down to “five”, excluding Scott Bessent, who is also in the running himself – current Fed governors Christopher Waller and Michelle Bowman, National Economic Council Director Kevin Hassett, former Fed Governor Kevin Warsh, and BlackRock executive Rick Rieder. Whoever takes the seat will no doubt take a dovish^[1] stance on rate cuts in the next rate cutting cycles. Markets are already priced into at least one more cut by the end of 2025^[2].

First I want to address the elephant in the room – are US (mainly tech) stock valuations bloated? In my opinion, US stock valuations are overvalued in the context that expectations are way too high and I think that it is worrying. Meta Platforms for example, recently releasing their 3rd quarter earnings missed the consensus EPS^[3] by 82%, stock price was trading down 11% after the earnings call. In short, the street has been chasing perfection for too long. Many assets are trading at crazy high valuations, the S&P 500 for example, investors are now paying more than 40 times^[4] the underlying, a multiple that was only exceeded by the dotcom bubble. In my opinion some sort of correction should be healthy – less volatility for the long term and a more steady bullish trend.**

Where should one stand amidst the chaos?

I would think that US financials seems to be the obvious choice. Historically, with a sample of one, has outperformed in year two of the first Trump administration. Who, no doubt in his second administration, will continue with his favorite tax cuts for his ultra wealthy friends in finance and further deregulate the industry. The S&P Financials Index (XLF) rose about +20–25% in 2017, outpacing the S&P 500 early in President Trump’s first term. With a small exception of Wells Fargo, which still perform reasonably well as a laggard, as they got into trouble for potential criminal and civil liability stemming from a practice between 2002 and 2016 in which they eventually settled for 3 Billion USD^[5]. But the sector lagged in 2020 when rates dropped to near zero. As I have mentioned before, given the dovish rate stance of the Fed, we should expect more cuts. What’s different this time?

The obvious difference is that there is no Covid. The Fed’s stance on the 2020 rate cuts were not to stimulate growth, but a crisis response. At the time of cutting rates in 2020, rates were already low, near 1.5% to 0%. Loan demand would have played a huge role in 2020, as lockdown would have collapsed loan demands and put significant stress on credit, both household and commercial. Therefore logically, you would think that in a much healthier US economy, rate cuts will encourage loan demands this time around as interest rates are getting cut.

Besides that, I would also like to explore the concept of quantum computing. Quantum computing is an emergent field of computer science and engineering that harnesses the unique qualities of quantum mechanics to solve problems beyond the ability of even the most powerful classical computers – IBM. Currently this is still much of a theoretical concept, only HSBC in collaboration with IBM developed a trial model that has real world application – up to a 34% improvement over purely classical techniques for predicting which trades would be completed. Besides in finance, quantum computers should, in theory, outperform classical computing powers in most decision making abilities, making them applicable for the vast majority of industries. This is without mentioning President Trump’s interest in the subject, as there are current talks for the administration to take some sort of stake in quantum computing firms in exchange for federal funding, similar to what they did with Intel. However, I personally would not feel comfortable dabbling with the potential stocks or ETFs^[6] yet (although I don’t even really touch ETFs at all), as stock prices for quantum computing firms remain highly volatile. Is it a case that quantum computers will eventually replace classical computers? Not so clear, but this is certainly an interesting concept to further explore.

My cautions, as mentioned before, I am very cautious on the valuations at this current level. Other than valuation concerns, be aware of the extreme cyclicality of semiconductors and chips, keep in mind that it was expected that there will be an AI chip shortage going into 2025 and that appears to be the case as supply of AI chips remain extremely tight. I expect this would also be the case heading into 2026. I would personally be very aware of volatility, as we all know that US tech carries a lot of weight in the three major US indexes, maybe the VIX index^[7] can give a good idea on the current volatility. Therefore I would like to think that a lot of straddle strangle options strategies can work really well.

Tian Xuan Zhou (Oliver)
Student, New European College – Munich

** As of finishing this article, the US market has just opened lower on the 4th November, concerns about AI stock valuations sparked by Palantir’s earnings, as well as Oracle, huge P/E valuation concerns with a forward P/E of 35. I have moved a large section on US tech and Palantir specifically to next week’s writing because I think they deserve their own section, also it would make this week’s writing way too long.

^[1] Monetary policy stance that favors lowering interest rates

^[2] As of 30th of October, the federal reserve board has voted for a 25bps cut lowering their benchmark lending rate to a range between 3.75% and 4%

^[3] Earnings per share

^[4] Using CAPE ratio

^[5] From DOJ Archives

^[6] Exchange Traded Fund, a basket of multiple different underlying assets traded as one

^[7] VIX is a volatility index derived from S&P 500 options for the 30 days following the measurement date, with the price of each option representing the market’s expectation of 30-day forward-looking volatility